Davos 2008: Outrunning the avalanche

bbj.hu

Tuesday, January 22, 2008, 07:53

With the world’s financial markets teetering on the brink of panic, the world’s most powerful executives, financiers and politicians will be searching for answers to the global credit meltdown when they gather for their annual retreat in this week in the Swiss Alps.

The annual meeting of the World Economic Forum in Davos isn’t designed to produce detailed policy proposals, but participants say it will provide a platform to take a look at what went wrong. And front and center will be a look at how the practice of selling mortgages to home buyers and then re-packaging them and selling them as securities to other institutions got so out of hand on a global scale. “I think there will be a high level debate on whether the ‘originate and distribute’ model now prevalent in financial markets is sustainable,” said Howard Davies, director of the London School of Economics and Political Science. “That’s the high-level politico-economic question.” “High-level” discussions of the world’s problems are Davos’ stock in trade.

A Thursday session on systemic risks features both US Treasury Secretary Henry Paulson and European Central Bank President Jean Claude Trichet. Other notables from the world of finance include Goldman Sachs Group CEO Lloyd Blankfein, private-equity honcho Stephen A. Schwarzman of Blackstone Group and hedge-fund titan George Soros. And some executives from banks at the heart of the subprime problem are also expected to be on hand, including new Merrill Lynch CEO John Thain. The meeting will be in stark contrast to last year’s private-equity love fest, where soaring financial markets and a record run in mergers and acquisitions and buyouts had global leaders predicting more good times to come. Since August, when the US subprime lending crisis hit, and subsequently froze many debt and derivatives markets, markets in the US have plunged, and taken many large Western markets with them.

Decoupling debateParticipants are also certain to dissect the “decoupling” scenario, which holds that strong growth by emerging economies will help insulate the rest of the world economy from a US slowdown. Economic indicators are signaling slowing growth in Europe. And while emerging economies appear largely unscathed so far by the fallout, worries about the US picture have put pressure on some benchmark stock indexes in Asia and Latin America since the beginning of the year. The mood is certain to offer gloomy comparisons to last year’s event. Despite some warnings about the potential ramifications of a US housing bubble and alarm bells about underpriced risk in world financial markets, participants were upbeat about prospects for world growth and markets. The ongoing buyout boom ensured that hedge fund and private equity honchos were the superstars of last year’s event.

But this week’s limelight is likely to be trained on sovereign wealth funds from the Middle East and Asia, who have both gratitude and fear by investing billions to shore up troubled banks from Citigroup to Merrill Lynch. Buoyed largely by growing oil profits, rising commodity prices and burgeoning foreign exchange reserves, funds controlled by governments in the Middle East and Asia have grown rapidly in recent years. The growing role of the sovereign wealth funds - government-controlled pools of investment capital - in world financial markets merely demonstrates a shift in “the balance of power and capital flows,” said Kenneth Broux, an economist with Lloyds TSB in London. But the funds’ government masters create anxiety. “I think there will be a lot of debate about whether this re-capitalization of western financial institutions by sovereign wealth funds is an entirely benign development ... or whether there will be a political dimension to those investments in due course,” Davies said.

On the sidelinesOf course, the fate of the world economy isn’t the only topic on the agenda. The forum features dozens of daily panel discussions, seminars and closed-door forums on an eclectic range of topics including climate change, corruption, “business diplomacy,” the US elections and how businesses can use scent as a marketing tool. In addition to the heavyweights of high finance, the roster of participants offers a who’s who of corporate heavyweights and political leaders as well as a smattering of musicians, actors and authors. Al Gore, the former US vice president and Nobel Peace Prize winner, will team up with U2 frontman Bono to discuss how to combine solutions to extreme poverty and global warming. UK Prime Minister Gordon Brown is among the high-profile world leaders that organizers say is set to attend. And not to be outdone, Brown’s predecessor Tony Blair is serving as one of the meeting’s seven co-chairs. Blair, who recently accepted a high-paying, part-time gig with J.P. Morgan Chase, shares co-chair honor with his boss, CEO James Dimon. They’re joined at the head table by Henry Kissinger, the former US secretary of state; PepsiCo. CEO Indra Nooyi, and Chevron Corp. CEO David J. O’Reilly. From the developing world, the roster of co-chairs includes Wang Jianzhou, the CEO of China Mobile Communications Corp. and K.V. Kamath, head of India’s ICICI Bank.

US Secretary of State Condoleezza Rice kicks off the event Wednesday with a speech on climate change and terrorism. And when it comes to high-level discussions of financial issues, there’s a Thursday session on systemic financial risk featuring US Treasury Secretary Henry Paulson and European Central Bank President Jean-Claude Trichet. Japanese Prime Minister Yasuo Fukuda might make news Saturday, when he delivers an address that Japanese news reports say will include goals for reducing the country’s carbon emissions beyond the 2012 expiration of the Kyoto climate-change protocol. While organizers have sought in recent years to downplay the role of glitzy Hollywood stars, the gathering won’t be without big names from the worlds of literature, music and film. Cellist Yo-Yo Ma, actress Emma Thompson, singer Peter Gabriel, and author Paulo Coehlo are among those slated to attend. Microsoft Corp. Chairman Bill Gates - a Davos regular who has used the forum to tout anti-poverty efforts in the developing world - will be in attendance, as will other tech industry heavyweights, including Dell Corp. CEO Michael S. Dell and Cisco Systems CEO John Chambers. The big wheels of private equity and hedge funds will again be well represented. Blackstone Group CEO Stephen Schwarzman, Carlyle Group co-founder and managing director David Rubenstein and hedge-fund titan George Soros are slated to attend.

In all, more than 2,500 participants from 88 countries are expected to descend on the tiny ski town, organizers said, including 27 heads of state or government, 113 cabinet ministers and more than 1,300 corporate CEOs or chairmen. (Marketwatch)

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